KUALA LUMPUR, Malaysia -- Malaysia Airlines said Friday it plunged into the red in the first quarter, hit by a triple blow of overcapacity, fuel hedging losses and the global economicslump which hurt passenger and cargo demand.

It warned of tough prospects this year as airlines are forced to cut fares to boost sales.

The flag carrier posted a net loss of 695 million ringgit ($199 million) for January-March, compared to a profit of 120 million ringgit a year earlier. The decline was blamed on derivative losses - mostly losses on its fuel hedging contracts - of 557 million ringgit, it said in a statement.

Revenue fell 28 percent to 2.7 billion ringgit ($771 million) as the percentage of seats filled fellsharply while yields - which measures income per seat - dwindled further, it said.

Managing Director Idris Jala said the airline has cut passenger capacity by 11 percent in the first quarter and may further reduce capacity to cut cost in line with falling demand.

Its operating loss for the quarter was 138 million ringgit ($39 million).

"This is the first operational loss for Malaysia Airlines since the third quarter of 2006 as it faced a triple squeeze: overcapacity, extreme fuel volatility and a global slump," he told reporters.

But he said the airline's fundamentals remained strong, with a cash balance of 3.8 billion ringgit ($1.1 billion).

The airline said air travel demand was expected to remain soft. It warned that the "outlook remains challenging as yield pressures continue to mount as airlines proceed to reduce fares and fuel surcharges to encourage consumers to travel."

The flag carrier said it has decided to maintain its fuel hedges as oil prices rallied past $70 a barrel recently. It has hedged 47 percent of its fuel requirement this year, 60 percent of its needs for 2010 and 40 percent for 2011 at a price of around $100 a barrel, Jala said.

He said Malaysia Airlines will further trim costs by up to 1 billion ringgit ($286 million) this yearwith no new aircraft deliveries until the end of 2010, freezing new recruitment and cutting budgets across the company.

He said the World Health Organization's move to raise its influenza pandemic alert for swine flu to its highest level was a "point of concern going forward" but didn't elaborate.

Malaysia Airlines had net profit of 244 million ringgit ($68 million) in 2008, down sharply from a record 851 million ringgit in 2007.

The International Air Transport Association on Monday predicted the world's airlines wouldcollectively lose $9 billion this year - nearly double the previous projections. Asia-Pacific's carriers are expected to be the hardest hit with losses of $3.3 billion, worse than the previous forecast of $1.7 billion.http://www.forbes.com/feeds/ap/2009/06/12/ap6536808.html

S&P says it understands that MAS has broached the idea of swapping the A380 for smaller wide-body aircraft to avoid up to US$300 million in penalty if it were to cancel the order

Malaysia Airlines (MAS) (3786) may be considering replacing its order for six Airbus A380 superjumbos with smaller wide-body aircraft such as the A330 or A350, according to a Standard & Poor's (S&P) report.

"We understand that MAS has broached the idea of swapping the A380 for smaller wide-body aircraft such as the A330 and Airbus' upcoming A350 to avoid a massive penalty of up to US$300 million (RM1 billion) if it were to cancel the A380 orders," S&P Asia Equity Research analyst Shukor Yusof said in a report.

According to a source familiar with the situation, MAS is looking to buy as many as 18 A330s, with the option to buy another seven.

"The fact is, we have said that we are planning to replace our wide-body aircraft. Currently, we are evaluating various options to ensure that the aircraft complement our fleet replacement strategy.

"At the same time, we need to match the new aircraft to our network growth plans, especially for key markets such as South Asia, China, Australia and the Middle East. For these key areas, we want to offer our customers increased frequencies for added convenience and better connectivity," Tengku Azmil said through e-mail.

"In the meantime, we continue to evaluate our options on the wide-body aircraft," he said.

In his report, Shukor said that MAS was having second thoughts on the operational viability of the A380, the first of which is scheduled for delivery in 2011, due to the current economic recession and a decline in air traffic.

Recent reports on launch customer Singapore Airlines' inability to fully maximise the yields on its A380 were also said to have given MAS cold feet in proceeding with the purchase.

MAS ordered the A380s in late 2003 through Penerbangan Malaysia Bhd, a leasing company owned by the Ministry of Finance.

MAS currently operates 14 A330-200/300s with an average age of 13 years.

"If the swap were to take place, MAS would likely phase out its entire fleet of Boeing wide-body aircraft comprising seventeen 777-200s and thirteen 747-400s," said Shukor.

MAS already has an order for 35 narrow-body 737-800s, with another 20 on option, delivery of which will start in the fourth quarter of next year. However, these planes are more for regional flights.

"A re-fleeting of its aircraft would be a major step for MAS considering that the 777s and 747s have been the workhorses for MAS and many other successful airlines. MAS will have to carefully consider whether the A330s or A350s can serve the airline as well as the Boeings did," Shukor told Business Times over the telephone from Singapore.

He said that while cancelling the A380 orders was an option, it appeared to be the best in the long run, even if costly for MAS.

Malaysia Airlines' cargo arm MASkargo plans to add another two Airbus A330-200 freighters to its fleet by the first half of 2012.The carrier placed a firm order for two A330-200Fs in March, along with options for another two.A MASkargo spokeswoman declines to confirm if the carrier is converting the options into firm orders, but says: "Discussions are also underway to get the other two freighters delivered by the first half of 2012."MASkargo will receive its first freighter in September 2011, and the second in November 2011, she adds.The airline also expects a fifth Boeing 747-200F, leased from US operator Southern Air, to arrive by September.This will be used as a spare aircraft to support MASkargo's four 747-200Fs, all leased from Southern Air.The addition will take MASkargo's 747 freighter fleet to seven aircraft, says the spokeswoman.

Report: AirAsia to take 20% stake in Malaysia AirlinesBy: Geoffrey ThomasMalaysia Airlines and arch rival AirAsia are reported to be planning a share swap that would give AirAsia's parent a 20% stake in Malaysia's national airline, according to Reuters. The news wire reported that Malaysia's state investment arm, Khazanah Nasional, which owns nearly 70% of MAS, would take a 10% stake in AirAsia. Analysts suggest the deal would enable MAS to focus exclusively on premium long-haul services and leave domestic routes and short-haul routes to AirAsia.

According to the report, AirAsia founder and CEO Tony Fernandes and his deputy Kamarudin Meranun will sit on the MAS board following completion of the transaction. AirAsia officials did not return calls from ATW seeking comment.

Lending credence to the report is the fact that both carriers have temporarily halted trading. Reuters reported that the trading halt will last until Tuesday with an announcement about "a material transaction" to be made by Tuesday.

The development has fascinating ramifications for Qantas and low-cost subsidiary Jetstar. In June, QF announced it was sponsoring MAS's entry into oneworld and indicated the partnership would be a springboard for growth (ATW Daily News, June 7). In 2010, Jetstar and AirAsia entered into an alliance to reduce costs and pool expertise (ATW Daily News, Jan. 7, 2010). At the time, Centre for Asia Pacific Aviation Chairman Peter Harbison said the agreement could be the start of something bigger, with codesharing and equity exchanges at a later stage. "This is all about let's live together before we get married," he said.

Malaysian Airline System Bhd. (MAS) has taken a 5-inch lead over Singapore Airlines Ltd.That’s how much wider the carrier’s first-class seats will be than Singapore Air’s when it starts flying the Airbus SAS A380 in July. In total, passengers will have more space than on a single-bed mattress, with seats measuring 40 inches by 87 inches.

The new seats, costing about $9,000 for a round trip to London, will spearhead Malaysian Air’s push to win corporate and long-haul travelers after higher fuel prices and competition from budget carrier AirAsia Bhd. (AIRA) led to a 2.5 billion ringgit ($795 million) loss last year. Thai Airways International Pcl (THAI) will also get its first A380s this year, adding a further challenge for Singapore Air.“Malaysian Air has to improve on their premium services in order to be able to compete,” said Joshua Ng, an analyst at RHB Research Institute Sdn. in Kuala Lumpur. “There is a bit of national pride involved as well -- especially when you’re talking about competing with Singapore Air.”The carrier, the eighth A380 operator, will start flights with the plane on July 1 with a trip to London. Daily services on the route will begin Aug. 25. Flights to Australia and another country will be added as more of the planes enter service, Anbarasu Sundram, a spokesman for the airline based in Subang outside Kuala Lumpur, said by phone. The last is due to arrive in February.

Widest SeatsMalaysian Air, controlled by state investment fund Khazanah Nasional Bhd., will fit its A380s with 494 seats. The eight first-class units, which will be on the lower deck, are wider than any seats listed on comparison website seatguru.com. The planes will also have 66 business-class seats on their upper floors and 420 coach seats divided between the two decks.Yields, a measure of average ticket prices, are typically 5.5 times higher in first class than coach, compared with business-class’s 3.6 ratio, according to aviation consultant Rigan Doganis. The seats are also important in terms of marketing and for maintaining the loyalty of business travelers through potential upgrades.“First-class is retained for prestige and brand, and as an incentive in the frequent flier-program,” said Andrew Wong, London-based regional director for TripAdvisor Inc. (TRIP)’s flights division, which owns seatguru.com. Few first-class passengers buy tickets themselves, he said.Asian and Middle East carriers have kept first-class cabins, which have been largely eliminated by North American carriers, because of their greater focus on long-haul routes, he said. Emirates Airline, the largest A380 operator, has fitted showers in the premium cabins of its superjumbos.

Malaysia Airlines could decide between the Airbus A350 and Boeing 787 as its future of its long-range fleet as early as March/2015 for delivery in 2017 as a first step in a sweeping restructuring of the airline. ... “The A350 and 787 are both very good aircraft, as to which we choose, it depends whether Airbus and Boeing can convince us which is the better fit” Lee said, “but so far we have not looked into the 777X.”